Friday, September 23, 2011

Trust Certificates: New Gateway Post

I am no longer able to update my Gateway Post on Trust Certificates (TCs). TRUST Certificates: Links in One Post The reason for that post is that I was no longer able to update the original Gateway Post on this topic published in 2009. Trust Certificates Links in One Post

Snapshots of realized gains from trading TCs can be found at the end of this post. 

So, I have decided to just try a new post on the topic and to organize it more efficiently. In this post I am going to summarize the key terms of each trust certificate (TC) that I currently own, or have owned, provided the TC can still be purchased by an investor. Most of the TCs that I have owned have been redeemed by the owner of the call warrants. More on the Call Warrant in TCs Call Warrants and Trust Certificates Call Warrant Exercised on JZE and JZJ  Those redeemed securities will only be referenced in passing at the end of this Post. 

I will also provide links to my discussions on each TC, as well as links to the FINRA information on the underlying bond, the prospectus for the TC and the prospectus for the underlying bond.  

Links to the FINRA information on the underlying bonds can also be found at LINKS TO FINRA INFORMATION ON UNDERLYING BONDS IN TRUST CERTIFICATES.

A TC is a form of exchange traded bond. An Exchange Traded Bond is traded like a stock on the stock exchange.  

A TC represents an undivided beneficial interest in bonds owned by a Grantor Trust. Those bonds are referred to as the underlying security. The trust is administered by an independent trustee who is charged with collecting the bond interest payments and then distributing those funds to the owners of the TCs. Most TCs have a par value of $25 which makes them easier to purchase for most individual investors, compared to bonds traded in the bond market that have a $1,000 par value.

The TC will have the same maturity as the underlying bond. The longer term bonds contained in TCs will have Make Whole Provisions, a provision found in many long term bond prospectuses, that renders it less likely that the issuer will redeem the bond.

The Grantor Trust is formed by a brokerage company who buys the bonds in the bond market.  The trust then buys the bonds from the brokerage company with the proceeds realized from the sell of TCs in a public offering. Since the bonds are being purchased in the secondary market, their price may be at a discount or premium to the then existing par value. That fact can result in the TC having a lower or higher coupon than the underlying bond.

The number of bonds originally deposited in the Grantor Trust will fluctuate up or down depending on that difference in coupons. A very detailed account of that process is provided in Item # 7 More on Call Warrants and TCs, in connection with the TC XFJ that was redeemed by the owner of the call warrant. XFJ had a 8.375% coupon whereas the underlying bond only had a 6.5% coupon. To support the higher coupon for the TC in the case of XFJ, more bonds with the 6.5% coupon would have to be deposited into the trust. The larger number of Motorola bonds made it juicier for the owner of the call warrant to redeem the TCs, as explained in that post. 

When the Grantor Trust is formed, the agreement will generally grant the brokerage company the right to call the TC at par value plus accrued interest. This right will frequently serve to cap the price movement of the TC. A few TCs do not have call warrants attached to them.

Information about trust certificates can also be found at (free site, registration required). The TCs are described as third party trust preferred securities at that site. I think that description will confuse some investors.  Unlike the typical trust preferred stock that represents an interest in a junior bond owned by a trust, a TC can represent an interest in a senior bond, though many of them do have TPs as their underlying security. 

The following list will first identify the issuer of the underlying security, the TC's symbol and prospectus, the maturity date and coupon, FINRA Information on the underlying bond, the underlying bond prospectus, and lastly links to my discussions. I am omitting references to TCs that have been bought and redeemed, other than just a brief mention at the end of this post.  

TC Prospectus:
TC Maturity Date 4/1/2036 at $25
TC Coupon: .8% over 3 month T Bill (max: 8%)
FINRA Information on Underlying Senior Bond:  FINRA
AON (KTN) (no call warrant attached) and HJO (underlying security for both TCs is the same TP)
KTN TC Prospectus:
HJO TC Prospectus:
TC Maturity DATE: 1/1/2027
KTN TC Coupon: Semi-Annually at 8.205% on $25 par value
HJO TC Coupon: Semi-Annually at 6.875% on a $25 par value
FINRA Information on Underlying Bond, a TP: FINRA
Underlying Bond Prospectus:
TRUST CERTIFICATE AON BOND KTN ORDER FILLED 100 shares at $13.1 October 2008
KTN add at less than $14 November 2008
Sold 50 of 150 KTN at 28.17 September 2010
Bought 50 of the TC HJO at 24.90-Roth IRA
TC HJO Called

AT & T (JZJ) 
TC Prospectus JZJ:
Maturity: 11/15/2031
Coupon:  Semi-annually, Now at  Minimum of 6.375% Subject to Increases in Event of Debt Downgrade(s)
FINRA Information Underlying Senior Bond: FINRA

AT & T (GYC): Synthetic Floater (originally SBC):
TC Prospectus:
TC Maturity: 6/14/2034
TC Coupon: Quarterly at the greater of 3.25% or .65% above 3 month LIBOR (max: 8%)
Underlying Senior Bond Information at FINRA: FINRA
Underlying Bond Prospectus: Prospectus Supplememt (senior)
Bank of America (MJH)-Underlying security is a TP
TC Prospectus:
Coupon: Quarterly at 7.25% on $25 par value
Maturity: 12/31/2026
Subsequently Redeemed by Issuer July 2012

Bank of America CPP (formerly Countrywide)-Underlying Security is a TP
TC Prospectus:
Coupon: Semi-annually at 8.05% on a $25 par value
Maturity: 6/15/2027
FINRA Information on Underlying TP:  FINRA 
Bought Back 50 CPP at $21.35 September 2011 (extended discussion of successor liability issue)
Sold 50 CPP at $24.93
Redeemed by ISSUER December 2012

CNA Financial
CoreLogic (formerly First American)
CTL (FJA) (formerly Embarq):
TC Prospectus:
Coupon: Semi-Annually at 7.1% on a $25 par value
Maturity: 6/1/2036
FINRA Information on Underlying Senior Bond: FINRA
Underlying Bond Prospectus: Form 424(b)(4)
CTL Acquires Embarq 
CTL (PJA) (formerly Qwest Capital): 
TC Prospectus:
Coupon: Semi-annually at 8% on a $25 par value
Maturity: 2/15/2031
FINRA Information on Underlying Senior Bond: FINRA
Bought 50 PJA at 19.45 December 2009
Bought 50 PJA at 24.65 December 2010
Bought 50 of the TC PJA at 25.06 April 2011
Added 50 of the TC PJA at $24.6 November 2011
Sold 50 PJA at $25.4-ROTH IRA
Bought 50 PJA at $25.18 September 2013
Call Warrant Exercise on PJA/Trust Termination for PKH

CTL (KCW) (formerly Qwest, formerly U.S. West)
TC Prospectus:
Coupon: Semi-annually 7.5% on a $25 Par value
Maturity: 11/15/2043
FINRA Information on Underlying Senior bond: FINRA
Bought 50 KCW at 24.9 August 2011
SOLD 50 KCW at $25.44

Dominion Resources: (SYNTHETIC FLOATER)
TC Prospectus:
Coupon: Monthly at Greater of 3% or 1.15% over 3 month T Bill (Max: 8%) on $25 par value
Maturity: 6/15/2035
FINRA Information on Underlying Senior Bond: FINRA
Underlying Bond Prospectus: FORM 424B5
Bought GJP at $17.5 April 2009
Bought 100 GJP at $18.97 October 2009
Sold 100 GJP at 22.42 February 2010
Bought 50 GJP at 20.55 July 2010
Duke Capital (now Spectra Capital)
TC Prospectus:
Coupon:  Semi-annually 7.875% on a $25 par value
Maturity: 2/15/2032
FINRA Information on Underlying Senior Bond: FINRA
Prospectus on Underlying Security:
SOLD 100 JBI AT PAR VALUE January 2009
Bought 100 of the TC JBI at $25.1 October 2009
Sold 100 JBI at 26.5 January 2011
Bought 50 of the TC JBI at 25.31 March 2010
Bought 50 JBI at 24.81-ROTH IRA MAY 2010
Sold 50 of 100 JBI at $26.25
Goldman Sachs (SYNTHETIC FLOATERS) All $25 Par values
GJS Monthly Coupon .9% over 3 month T Bill (max 7.5%)
GYB Quarterly Coupon Greater of 3.25% or .85% above 3 month LIBOR (max 8.25%)
PYT Quarterly Coupon Greater of 3% or .85% above 3 month LIBOR (max 8%)
Underlying security for GJS is a senior bond maturing 2/15/2033
Underlying security for GYB and PYT is a trust preferred maturing on 2/15/2034
FINRA Information on 2033 Senior Bond: FINRA
FINRA Information on 2034 TP: FINRA
Sold 100 GYB at 18.09 April 2010 (May Post) (Lot purchased at $10.95)(snapshot Item # 3 Stocks & Politics
Sold 100 GYB @ 19.4 in Regular IRA October 2010 (two 50 share lots bought at $18.49 and $17.97) 

Goldman Sachs (Fixed Coupon TCs)-All $25 Par values and Semi-Annual Distributions 
PJI (senior)
JZS (senior)
PYB (senior)
DKW (senior)
FINRA Information on Senior Bond Maturing on 2/15/33) :FINRA  
FINRA Information on TP Maturing on 2/15/2034:  FINRA
Underlying Bond Prospectus for 2033 Senior Bond:
Underlying Bond Prospectus for 2034 TP:
Goodyear Tire (XKK):
TC Prospectus:
TC Maturity: 3/15/2028 at $10
TC Coupon: Semi-Annually at 8% on $10 par value
Underlying Bond Prospectus:
FINRA Information on Underlying Senior Bond: FINRA
Goodyear Tire TC (December 2008 Post)
Goodyear Tire XKK (November 2009 Post)
IPB (symbol)(collection of 15 corporate bonds and treasury strips):
Par Value $25/Maturity: Mixed
IPB Prospectus:

JP Morgan SYNTHETIC FLOATERS (underlying securities-TPs)
GJK: Maturity 3/14/2014 at $25   Monthly Coupon at Greater of 3% or .7% above 3 month T Bill (max: 6.75%)
PYV: Maturity 3/14/2014 at $25   Quarterly Coupon at Greater of 3.25% or .83% 10 YR. Treasury (max: 9.25%)
GJN: Maturity 8/1/2035 at $25  Monthly Coupon at Greater of 3% or 1% over 3 month Treasury Bill (max: 8%)
Liberty Media (PKK):
TC Prospectus:
TC Maturity: 7/15/2029
TC Coupon: Semi-annually at 8.5% on a $25 par value
FINRA Information on Underlying Senior Bond: FINRA (senior)
Sold PKK at 24.1 August 2010
Liberty Media (PIS): 
TC Prospectus:
TC Maturity: 2/1/2030
TC Coupon: Semi-annually at 8.75% on a $25 par value
FINRA Information Underlying Bond: FINRA (senior)
Sold Remaining shares in the TC PIS July 2009 (SNAPSHOT in Item # 1 Liberty Media and its Bondholders)
Bought 50 PIS at 25 October 2010
Bought 50 PIS @ 24.32 February 2011
Bought 50 PIS at 24.88 in Roth IRA
SOLD 100 PIS at 25.95 July 2011 
Limited (PZB)
TC Prospectus:
TC Maturity: 3/1/2033
TC Coupon: Semi-annually at 6.5% on a $25 par value
FINRA Information Underlying Senior Bond: FINRA
Underlying Bond Prospectus:
bought 50 pzb at $16.05 August 2009
Bought 50 of the TC PZB at 19.85
Sold All PZB at $22.3 & 22.49 August 2010

May Department Stores (now part of Macy's)
Proctor & Gamble (GJR)  Synthetic Floater
TC Prospectus:
TC Maturity: 8/15/2034 at $25 
TC Coupon: Monthly at .7% above the 3 month T Bill on a $25 par value (max: 7.5%)
FINRA Information Underlying Senior Bond: FINRA
Underlying Bond Prospectus: Final Prospectus Supplement

Prudential (JZH)
TC Prospectus:
TC Maturity: 7/15/2033
TC Coupon: Semi-annually at 6% on a $25 par value
Underlying Bond Prospectus: Prospectus Supplement (senior)
FINRA Information Underlying Senior Bond: FINRA
Sold 50 JZH at 24.45 (bought September 2008 at $14.81 total cost)
Sold 100 of the TC JZH at 24.11 (snapshot at Item # 6)(bought at $9.75 and at $21)

RR Donnelley (PYS)
TC Prospectus:
TC Maturity: 4/15/2029
TC Coupon: Semi-annually at 6.3% on a $25 par value
FINRA information on underlying bond: FINRA
Underlying Bond Prospectus: (senior)
Bought 50 PYS at 20.01 March 2010
Add 50 PYS at 19.59 June 2010
Sold 50 PYS at 20.76 July 2010
Sold  50 PYS @ 24 November 2010
Bought 50 PYS at 22.6 January 2011
Sold 50 of the TC PYS at 23.2 April 2011
Bought 50 PYS at $19.75 February 2014

Sears Acceptance (SSRAP)
TC Prospectus:
TC Maturity: 6/1/2032
TC Coupon: Semi-annually at 7.25% on $25 par value
FINRA Information Underlying Bond: FINRA
Underlying Bond Prospectus:
Sprint (GJD):
TC Prospectus:
TC Maturity: 11/15/2028
TC Coupon: Semi-annually at 6.5% on $25 par value
FINRA Information on underlying Sprint Capital Bond:   FINRA
Underlying Bond Prospectus for Sprint Capital Senior:
Unum (PJR):
TC Prospectus
TC Maturity: 12/15/2028
TC Coupon: Semi-annually at 7.4% on a $25 par value
FINRA Information on Underlying Senior Bond:
Bought 50 PJR at 16.72 July 2009
ADDED TO PJR at 20.7 October 2009
Bought 50 PJR in ROTH IRA at $23.61 May 2010
Bought 50 PJR in ROTH IRA at 24.88 October 2010
Sold 50 PJR at 25.79 May 2011
Sold 100 of the TC PJR at 25.76 December 2011

Unum (KSA)(formerly Provident) Underlying security is a TP
TC Prospectus:
TC Maturity: 3/15/2038
TC Coupon: Semi-Annually at 8.5% on a $24 Par Value
FINRA Information On Underlying Bond, a TP: FINRA
BUY OF 50 KSA IN IRA AT 16.31 February 2009
Buy KSA at $11 March 2009
SOLD KSA at $13.2 March 2009

Verizon (PJL)
TC Prospectus:
TC Maturity Date: 12/1/2030
COUPON: Semi-Annually at 7.625% on a $25 par value
FINRA Information on Underlying Senior Bond: FINRA

TC Prospectus: 
TC Maturity Date 2/15/2030 at $25
TC Coupon: .5% over 3 month LIBOR with a maximum of 7.5%
FINRA Information Underlying Senior Bond: FINRA

For synthetic floaters, the coupon mentioned above remains in effect for as long as the swap agreement remains in effect. If that agreement is terminated, then the owner of the TC will receive the fixed coupon of the underlying bond. To my knowledge, JBK is the only TC that had a swap agreement terminated, due to the swap counterparty (Lehman) filing for bankruptcy: Prior to that termination JBK was a synthetic floater and became a fixed coupon TC after that termination. New Information about JBK

Trust preferred securities are covered in another Gateway Post: Trust Preferred Securities: Links in One Post

Exchange Traded Bonds
Synthetic Floaters
Aegon Hybrids: Gateway Post
ING HYBRIDS: Links in one Post
Advantages and Disadvantages of Equity Preferred Floating Rate Securities

Some of the TCs that have been redeemed at their $25 par values, plus accrued interest, and were previously owned by me, include the following (all called by the owner of the applicable call warrant except for Xerox which was called by the issuer):

AFC Capital PKM and KRH (Hanover Insurance): Bought 50 KRH in IRA at 18.62 Bought 150 TC PKM at 17.8 & 17.5 Bought 50 of the TC KRH at $19 Bought 50 PKM at 24.84 Bought: KRH at 24.85
AON DKK and KVW: Bought 50 DKK in Roth TC DKK at 23.34 Sold 100 KVW at 24.75
AT & T: JZE  Bought 100 JZE at 12.5
Daimler: GJL Bought Another 100 of GJL at $20.6
DPL:  MJT MJV Bought 100 MJT at 22.57 Bought 100 MJV
First Union (now part of Wells Fargo): KTV Rounded KTV to 100 Shares at less than 18
Goldman Sachs: DKW Bought 100 DKW at 22.86 Bought 50 DKW @ 23.07
Goodrich DKF: buy 50 of dkf at $20
Motorola XFJ Bought 50 XFJ at 25.38 Added 50 XFJ in Roth at 25.3 Bought: 50 XFJ @ 25.15
News America BOUGHT:  50 XFB at 25.5 Added 50 XFB @ 25.39
Sprint DHM DKI Bought 50 of the TC DHM at 21.35 Bought 50 DHM @ 24.51 Bought 50 DKI at 24.95 Sold DHM at 24.4
Time Warner PYI: Bought TC PYI at $19.05 Bought 50 PYI at 23.98
XEROX KTX Added 50 KTX at 25 Bought 50 KTX at 25.14 Roth IRA

For the most part, the current relevance of these securities involves how the call warrant comes into play.

ADDENDUM: I reader requested some proof of my trades. I routinely provide snapshots of many trades and some of those are referenced above. It will take some time to compile snapshots of all TC trades. I will start with the retirement accounts where the process of making these snapshots is easier and then move on to the taxable accounts. The foregoing snapshots are just realized gains. Virtually all of these gains were made with 50 to 100 share lots. I will add more as time permits, and I will add some captions that will enable anyone interested to find a particular trade.

Regular IRA:

REGULAR IRA 100 XFL +$821.98
2010 Regular IRA GYB +$774.42 / GJN +$460.53/ GYC +$36.08

2010 Regular IRA 50 Shares  JZH +$474.02 and 50 KTN +692.52

2010 PYT Regular IRA +$187.73

2011 Regular IRA 50 PKM $ 400.58/ 50 PJR +238.52/ JZV+79.26/ KTV

2009 Regular IRA GYC & GJR=$173.79
2009 Regular IRA 50 JZH +$275.47
2010 REGULAR IRA 50 JBK +82.08


2009 ROTH IRA PIS +$324.47/PKK +$316.99
2009 Roth IRA 100 GJK $460.93/ 100 GJO +$123.28/100 GJS +$244.53
2009 Roth IRA GJT +472.45 (2 trades) /50 GYB +$183.98

2010 ROTH IRA DKK DKQ DKW=+$251.21
2010 ROTH IRA 100 GJL +$309/GYB GJS GJD=+$163.72/GJP +$450.86 (2 trades)
2010 Roth IRA 50 Shares GJS +460.53
2010 ROTH IRA JZS +$44.07/ 50 KRH +283.02 
2010 Roth IRA 100 PYT +$685.02/50 PZB +$116.08

2010 ROTH IRA 100 PJS $1,079.22
2011 ROTH IRA PJL +$35.13/DKF +$202.55

2011 ROTH IRA 100 GYB (2 50 SHARE LOTS) +$68.97
2011 ROTH IRA JZV +$55.47
2011 ROTH IRA 100 Shares PJR +$129.55
2011 ROTH IRA 200 Shares GJP +$233.91
2012 ROTH IRA 100 Shares GYB +$61.22
2012 ROTH IRA 50 Shares JBI +$ 68.02
2012 ROTH IRA 150 GJN +$422.44
2012 Roth IRA 50 JBK +$35.97
2012 Roth IRA GYC +$357.45
2012 Roth IRA GYB +$69.06 (12/10/12)
2012 ROTH IRA 100 IPB +968.23
2013 Roth IRA 50 GJR +$44.48
2013 ROTH IRA 50 GJS +$154.48
2013 ROTH IRA 100 GYC +$194.01

2014 Roth IRA 50 PYS +$163.52
2014 Roth IRA IPB 50 Shares +$217.97

Taxable Accounts:
2009 TAXABLE 100 DKQ +$233.96
2009 Taxable 50 PYT/ 50 PYV +$179.87
2009 Taxable 150 JZV +$392.78/100 JZH +130.45 
2009 Taxable GJL GJN GJO GJP GJR GJS ($168.15) GJT GJX (sold synthetics-transferred to IRAs)=+$501.72

2009 Taxable FJA +50.47
2010 Taxable 50 DKR +$ 849.53/50 DKQ +$ 336.53/DKI/DHM/DKK=$86.2
2010 Taxable Account 100 JZE +$1,242/82 JZJ +$567.44 Both Calls 

2010 Taxable 50 MJH +$726.20 Adjustment to Cost Basis by Broker
2010 SATELLITE TAXABLE 100 DKW +224.95
2010 Taxable PYS +$222.68/50 PZB + $296.53 
                                            2010 TAXABLE 50 FJA + $ 458.02
                                                   2010 Taxable GJD +$224.11/ GJF  GJX=$183.52 
2010 Taxable 100  KRH +$292
2010 Taxable 100 JBK +$528.02
2010 Taxable PJI 100 +160.66/250 PJS +$1,100.18
2010 Taxable XFB/50 XFL +$242
2011 Taxable 50 PKM +$356/PJS/PJL +147.49/PIS +105.1/PJI
2011 Taxable Account 100 JZH (2 lots) +$767.55
2011 Taxable 100 MJV +$ 91.4
2011 Taxable 50 KTV +$396.66/KTX/100 KVW +$ 884.01
2011 Satellite Taxable 50 JZV $130.97

2011 Taxable XFJ/ XKK=+$192.56

2011 Taxable 50 FJA +$ 516.02

2011 Taxable MJV MJT=+$87.5

2011 Taxable XFJ/100 XKK (+$192.58)

2011 Taxable JBI $124 LT/$31.07 ST
2011 Taxable CPP +$114.07
2012 Taxable CPP +$163.02
2012 Taxable PJR 50 Shares  +$406
2014 Taxable JZV 150 Shares +$870.6
2014 Taxable PJA 150 Shares +270.6
2014 JZJ 94 SHARES +$488.17

Realized Gains as of 8/8/2014=$27,998.14

Of course, the main reason for investing in bonds is to receive interest payments.  


David said...


Your new introductory page is VERY helpful.

Don't be hesitant or embarrassed about answering the following questions truthfully, since I'm probably going to set up a watch list to follow your TC trades in any case:

1. Has your TC trading been generally profitable? I'd love to see some numbers, if you have any.

2. Has your TC trading been profitable recently?

Thanks a lot.


David: I do not expect much, if any, appreciation with new purchases made near or above par value. The general idea on any new purchases would be to collect the interest payments and then hopefully sell at any profit before interest rates start to impact the value of long term bonds. Sometimes, a TC will fall in price sufficiently to at least provide an opportunity to make a profit on the shares. My recent trading in the TC CPP is an example.

Many of the TCs now sell over their par values and are subject to being called by the owner of the call warrant at par value plus accrued interest. That fact alone will restrain the upward movement in price. An example would be the TC PJL, which contains a Verizon bond. It is uninteresting to me since it is selling at more than par value+ accrued interest and is subject to being called at anytime by the owner of the call warrant. I sold out of my position.

There are not many TCs to choose from now, as many have been called, so the opportunity to make money on the shares has largely passed. Any purchaser now would have to be content with the interest payments in my opinion.

The TC purchases made from September 2008 through 2009 were uniformly profitable. I have made snapshots of many of those trades. In my new Gateway Post, I have referenced several links to those snapshots and hope to add more in the coming days. For those where there are no current snapshots anywhere that I can find in my blog, I may add some snapshots for those at the end of this blog.

I will frequently make snapshots of the profits from trades and current holdings showing the cost of the position.

The largest percentage profits were made in DKR and PJS (small lot bought at $7.2, snapshot referenced in post) and I had a double in JZE bought at $12.5, when the owner of the call warrant called it in full at $25.

Anonymous said...

Thanks for you efforts here! I've averaged down in GYB and now I see the underlying has dropped from $100 to 92.60 so I guess investors are spooked about owning GS out to 2034, or any bank. $16.00 seems to want to hold on GYB, I sold 300 above $20 and now have 500sh again. Problem is the wait for next dividend, I notice those with closer next payout not dropping as much. I read hedgefunds had redemptions by Aug 15 to closeout before end of month, so this week may not see the usual window-dressing end-of-Quarter/month ramp-up. Also, look at this margin debt indicator, it CLEARLY spells bear market, I don't know how this can be refuted. The top in the Dow correlated with 3rd highest margin debt in history I think.(to 2000 & 2008)


There are two main problems for GYB now.

The first is that the perceived credit risk associated with any GS bond has been increasing due to macro issues involving a worldwide economic slowdown and possible recession and more importantly the sovereign debt problems in Europe that could end up having serious worldwide repercussions for financial institutions. The later problem is more serious for both GS and MS. That perceived increase in credit risk is enhanced for a junior bond issued by any large financial institution. The underlying security in GYB is a trust preferred, likely to become worthless in the event of a GS bankruptcy. GS and Morgan Stanley common stocks have been falling a lot lately. GS closed at $95.15 last Friday, down from 175 in January 2011.

The second is that there is now no realistic possibility for at least two more years that the float provision will be activated. I first bought GYB in 2009 and it was paying the 3.25% minimum coupon then. That is likely to be the coupon at least into 2013. Even without the perceived increase in credit risk, this security would be under some pressure due to that reasonable future forecast for the LIBOR rates.

I currently own just 50 GYB recently bought and may average down by buying another 50 on a break below $15.5.

GS can defer paying interest to the owners of the TP provided it eliminates the dividends on its common and non-cumulative equity preferred. If that happened, and GS also deferred paying interest on its TPs, GYB would likewise defer its payments. I do not view such an elimination and/or deferral to be a feasible alternative for GS since it would send their clients running. For an institution like MS or GS, the most likely scenario is there will be no deferral of the interest payments unless and until a bankruptcy petition is filed, the Lehman scenario, where the investment bank goes from paying everybody to nobody, including the senior debt holders, at the same time.

Another issue for pricing GYB is how much is the inflation protection provided by the float worth? If I could buy the underlying security and pick up say 3% more in yield, then I would not buy GYB, assuming I wanted to buy one or the other when buying neither might be the rational decision.

On the other hand, GYB would look more attractive if the current yield was 2% less than the fixed coupon yield of the underlying security. A rational market would price in a rational price for the inflation protection afforded by the float under a reasonable prediction about the future coarse of the 3 month LIBOR rates. At a total cost of $16.35, the close last Friday for GYB, and the payment of a 3.25% minimum coupon, the current yield is almost 5%. The current yield on the underlying fixed coupon TP, with a 6.345% coupon, is about 6.85% at a total cost of $92.639.

For a very long term holder presented with a choice of GYB or the underlying bond, GYB would be the better buy now. The discount to par value is greater. The inflation protection is less than 2% of current yield. The problem is the amount of time reasonably foreseeable now that a buyer would have to incur that difference in yield waiting for the GYB float to activate with a rise in the 3 month LIBOR rate. At a $16.35 total cost for GYB, the break point in current yield would occur approximately when the 3 month LIBOR crossed 3.65% which is not going to happen anytime soon, but that rate is below the long term average for the 3 month LIBOR rate.

.0365 % 3 month LIBOR + .0085 spread=.045% coupon multiplied by $25 par value=$1.125 divided by total cost of $16.35= 6.88%